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Sunday, August 26, 2012

Unit Trusts’ Price War!

As we were discussing in the last post, unit trusts charges slightly higher fees vs ETFs but it allows retail investors access to other asset classes outside equities.

Last checked there are about 400 unit trusts in Singapore with Asset Under Management (AUM) slightly under $40bn. The unit trust industry as a whole is not growing that much as alluded to before. When the market is not growing, the players need to grab market share in order to survive.

In the past unit trust charges high fees and doesn’t really value add much since most of the fund managers never fulfill their mandate anyways (which is to beat their benchmark). With the pie shrinking, the players have resorted to lowering fees in order to gain market share. Hence, the fees have been coming down over time. It used to be 5% upfront, now it’s closer to 1-3%.

A couple of years ago, our beloved national paper Straits Times happily announced a Unit Trust Price War was under way when some players cut the fees to 1%. The same article also happily interviewed so-called seasoned investors who invested $300k in unit trusts and who didn’t mind paying when upfront fee was 3-5%. Bcos if the financial adviser gave good advice, it was worth it! Well with that upfront fee amounting to $15k, I hope that he really did receive golden advice. Meanwhile, I give free advice here.

So since then, the industry never looked back, fees are coming down, though still high compared to ETFs at less than 1% but it’s much better than 5%. We don’t even get salary increment of 5% right? How did these guys justify 5% upfront fees in the past?
PhillipCapital has probably realized this dilemma for some time. How can fees be so high when investment return is only 5-8%pa over the long term. Even at say 2%, this still represents 25-40% of the annual return that you can get. So they upended the competition to bring fees even lower. Now Phillip charges 0.75% upfront fees and zero platform fees (see table below). Hence you save a lot of money over time. Like close to $2000 over 5 years, according to their calculations.

The table below compares their fees across the competition.

In fact, they are now having a promotion whereby you pay zero upfront fees for certain products. Of course there is still the management fee that each unit trust will charge, usually 1-2%. Sadly that’s still high in my opinion and that’s going to stay. Fund managers and analysts also have families to feed. We can’t expect them to eat their own research reports right?

Besides lower fees, Phillip also has other advantages such as zero cash deposit for investors who intend to buy (other competitors usually require some cash upfront). But if you choose to put cash with Phillip, then it is parked in a money market account that earns interest.

In fact, Phillip goes all out to grab market share.

They even offer this fund transfer service (usually FOC unless it’s StandardChartered or AIG, ie banks that are in trouble with regulators) whereby you can transfer your unit trust bought on other platforms or banks onto Phillip’s platform. And they give you $200 NTUC vouchers!

Last but not least, there is always the powderful online platform. For Unit Trust, you can read updated research published by the funds themselves, have a quick look at the funds information sheet and even screen for the top and worst performing funds. (See screen shot below)

As you can see, for 10 years, there are no funds except for this LionGlobal SGD Money Market. Maybe the history is still too short in Singapore. Or maybe any fund that get into the worst performing 10 year category auto shutdown so as not to lose face. Hopefully those seasoned investors did buy the Indonesia and Thailand funds, that would have made is $15k sales commission worthwhile.

Another interesting point is that this LionGlobal returned 15.66% over 10 years, which is like 1.4% per year. And we don’t know if this is before or after fees. So if the seasoned investor bought into this, his first 3-4 years of return would have been used to pay his financial adviser, who probably looked like Cecilia Sue.

In any case, at 1.4% return per year, you might as well buy Singapore Government Bonds (SGB), that’s risk free. Last checked, over 10 years it also gives 1.4%. Btw you can also buy SGBs over poems too! Well anyways, past performance is not a good indicator of future returns. So pls do not buy the top performing funds. Usually, that won’t work.

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